Sunday, January 23, 2022
Sterling shows that traders are relaxed about a change of PM
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

Markets can be very cruel. I always think that it adds insult to injury when, after a boardroom struggle, a long-serving chief executive is forced out and the share price responds by rising, in a “resignation rally”.

There is no national share price but the performance of the pound can be a reasonable proxy, The currency markets have made some big calls in recent years. Sterling fell sharply during the financial crisis, on the argument, which was both logical and largely borne out by events, that the UK was more vulnerable to it than most other countries.

It fell again after the EU referendum in 2016 – the biggest short-term fall of any major currency in the floating rate era – on the view that Brexit would be damaging to the UK economy and British politics, again largely borne out by events.

In recent weeks something else rather interesting has been happening into the pound, as measured by the sterling index, its average value against other currencies. You might think that a prime ministerial crisis, with Boris Johnson hanging on by his fingernails, would be bad for sterling. But, as his woes deepened, and the revelations kept coming, the pound has been going up, a rally that began in early December.

You might say that many things can affect the currency, and you would be right. The Bank of England surprised many by raising interest rates in December and that could have boosted the pound. But sterling’s rally started before that, and the latest figures, showing inflation at a three-decade high of 5.4 per cent and cementing expectations of a rate rise next month, did not push the pound higher.

Nor does it look to be about Omicron and the response to it. Only very lately, with cases coming down and restrictions being lifted, has that been a factor.

The pound has been rising because, according to currency analysts, markets are either neutral about whether the prime minister is forced from office or think it would be good news for the country if his chaotic leadership were replaced with something more sensible and, yes, prime ministerial.

Though it would depend on who succeeded him, Johnson could find himself in the position of the ousted chief executive, in the sense of his departure being followed by a rise in the pound. When last week he appeared to have headed off the pressure to go for now sterling softened a little.

The succession question may have been postponed for now but one clear frontrunner would be Rishi Sunak. I have not, I should stress, spoken to him about this but I can only imagine what it must have been like living above the shop in Downing Street with parties spilling out into the garden, some of them involving drunken late-night revelries and broken children’s swings.

Anybody who has lived next to a student house will know the kind of thing. The chancellor is teetotal, which probably makes it worse, even apart from the rule-breaking, though he is a self-confessed Coke addict – Coca-Cola I should quickly add.

You might think that the short step from 11 to 10 Downing Street is an easy, even automatic one, but it is rarer than you would expect. Only four chancellors since the Second World War have become prime minister, though others have had the ambition to do so. Denis Healey is sometimes described as the best prime minister Labour never had, while George Osborne thought he was a shoo-in to succeed David Cameron until the Brexit vote intervened.

The four who did make it were Harold Macmillan, James Callaghan, John Major and Gordon Brown. Their records in office were mixed.

Callaghan, who moved aside as chancellor in 1967 after implementing a devaluation of the pound he had previously promised not to do, becoming home secretary, was prime minister from 1976 to 1979, losing to Margaret Thatcher. He ticked off all four great offices of state; chancellor, foreign secretary, home secretary and prime minister.

Brown, a 10-year chancellor whose many achievements included independence for the Bank of England, took over as prime minister in mid-2007, just as the financial crisis was breaking out. Within weeks he was faced with the run on Northern Rock, the first significant run on a British bank since the 1860s.

Both Callaghan and Brown suffered from not calling general elections when they should have done, Callaghan having lined everybody up for an election in the autumn of 1978 and then deciding not to do it and Brown repeating history in the autumn of 2007 with “the election that never was”. They would both have probably won the elections they decided not to hold and modern British history. As it was, Callaghan’s hopes were killed off by the 1978-79 winter of discontent of strikes and disruption, and Brown’s by the full extent of the financial crisis and recession.

Of the two Tory ex-chancellors who became prime minister, Macmillan and Major, both also served as foreign secretary, though only briefly in Major’s case. Macmillan, known for reassuring voters that they had never had it so good – “let us be frank about it, most of our people have never had it so good” – and won a general election in 1959. But his second term was more difficult, with the economy in difficulty, and he resigned in 1963, citing ill health.

Major, who as chancellor had taken sterling into the European exchange rate mechanism (ERM) was also an election winner, winning in 1992 when, following a recession he was widely expected to lose. But the next five years were troubled, characterised by Tory divisions over Europe and sleaze, before his loss in a landslide to Tony Blair in 1997.

If that tells you that moving from chancellor to prime minister is harder than it looks, that would be a fair assessment. The current chancellor, whose political rise has been meteoric, is competent, well-liked and has great attention to detail, and you would not apply all, or most, of those qualities to the prime minister.

The question in coming months will be whether his tax rises become a political millstone for him. Having presided over a big and necessary increase in the size of the state during the pandemic, some of which will persist, in any leadership contest he would face competition from a small-state, low-tax opponent. The question would be whether his reassurances that he is a tax cutter at heart and only implemented the post-pandemic tax hikes out of necessity would convince the sceptics.

He probably thought that would be a question for much later, perhaps after he has delivered the pre-election tax cuts he wants to do. Sunak, like many people, will have been surprised by the speed of Johnson’s descent into the mire.

We shall see. In the meantime, keep an eye on the pound